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Diokno rules out asset price bubbles

THE Philippine central bank does not expect financial stability concerns to cause asset price bubbles and excessive credit growth after a coronavirus pandemic forced it to cut benchmark interest rates to a record.

“We at the BSP believe that we are not experiencing a trade-off between monetary accommodation and financial stability,” Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno told an online news briefing on Thursday.

He noted that while an accommodative policy stance could lead to excessive credit growth and asset price bubbles, this was unlikely during this crisis.

Asset price bubbles, which occur when the prices of stocks, bonds, property or commodities rise quickly without underlying fundamentals such as increased demand, had been blamed for some of the most devastating recessions.

Philippine economic output plunged by 9.5% last year — the steepest since the second World War — amid the global health crisis.

The recent uptick in inflation was not driven by demand but by factors on the supply side, Mr. Diokno said.

“Our latest assessment is that while inflation is likely to remain elevated in the coming months, it will eventually return to within the target range of 2-4% over the policy horizon as supply-side pressures subside,” he said.

“Urgent and well-coordinated nonmonetary interventions to ensure adequate domestic supply of key food items, particularly meat, will be critical over the next few weeks,” he added.

January inflation spiked to a two-year record of 4.2% and surpassed the central bank’s 2-4% target due to higher oil and food prices. The central bank expects inflation to average 4% this year, much higher than 2.6% last year.

The government has imposed measures to help curb rising prices, including capping the prices of some meat products and increasing meat imports with lower tariffs.

“The BSP will respond to second-round effects from supply-side inflation, as necessary,” Mr. Diokno said. “We will pay adequate attention to demand-driven inflation as economic recovery becomes self-sustaining.”

The governor said they also do not expect “any undue surge in asset prices.”

Residential property prices dipped by 0.4% year on year in the third quarter, led by condominium units which fell by 15% and duplex homes, which slid by 8.8%, according to central bank data.

On the other hand, prices of townhomes and single detached/attached houses rose by 12.4% and 7.4%, respectively.

“While we expect asset price inflation to remain manageable, the BSP continues to closely monitor market conditions for signs of imbalances or the potential presence of asset bubbles,” Mr. Diokno said.

The Monetary Board last week kept key policy rates and hinted it would remain accommodative despite rising inflation.

Last year, the central bank slashed rates by a total of 200 basis points (bps) to support the virus-stricken economy.

It also fired off measures to increase money supply, including a 400-bp cut in banks’ reserve requirements.

Mr. Diokno earlier said they would assess the timing of when they can unwind measures that started at the height of the pandemic to keep the financial system stable. — Luz Wendy T. Noble

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